Author: Paul Henriques in: Business Solutions
Most processes for improving your shop floor can take months and have questionable returns. This post isn’t about those. Here, we are discussing one of the key methodologies used in Lean manufacturing to decrease costs. The goal is to minimize waste and increase value by streamlining production processes. This method, is the Order Policy.
An order policy is just that. The policy used by your firm to order materials and parts from your suppliers and vendors. You likely have one or more order policy templates in use at your firm, like this one:
As you can see, this is a chart that describes the order policy, or how often to order a part, based on the cost for the order, the carry cost (what it costs to have the parts in stock), and the annual cost to order.
There are various calculations that can be used to determine the best order policy, but it’s possible that your shop uses something similar to both increase accuracy and decrease the time it takes to calculate the ideal order time.
With the above as a baseline, you can determine how much it costs to order parts and the carry cost. With the goal being to minimize the costs to you by decreasing the capital and warehouse space you have tied up in carry costs and the other costs related to inventory, like:
These are just some of the things that can cost you real money in the long run by having a less than ideal order policy.
To minimize ordering costs, OnRamp ERP has economic order quantity (EOQ) calculator. EOQ is a mathematical formula that is used to determine the optimal order quantity of materials or parts in a way that minimizes inventory costs while avoiding stockouts.
The OnRamp EOQ Calculator clearly shows you the savings you can get for your parts, based on the usage in the system and other settings that you can update. For example, the previous graph would recommend the 24-order period, or ordering twice a month, for a part that costs $100, and costs 65,000 per year. Here, you can see the costs for ordering 24 times a year are $900 more per year than the recommended 10.
In other words, by using EOQ, the production budget suddenly has a 900 dollar windfall, allowing the production of the same amount of parts with minimal waste and inventory costs.
OnRamp Solutions can help you implement these methodologies and optimize your production processes in a way that reduces costs and increases efficiency. With our expertise and experience, we will help you improve your productivity and your bottom line.
For more information about how OnRamp ERP software can add value to your business fill in the contact form below. A member of our support team will contact you within 1 business day to discuss any questions you have.